The Double-Edged Sword of Perpetual Futures in Crypto Trading

When discussing crypto trading with experienced traders, the topic of perpetual futures, or 'perps,' often comes up. These derivatives contracts enable traders to control larger positions with less capital. Perps function similarly to standard futures but lack an expiration date. For traders of alternative cryptocurrencies, perps are often the only viable option for derivatives trading, as dated futures for these assets are typically illiquid. The spot market is also less desirable for traders who don't plan to hold their positions long-term. To better understand the appeal of perps, CoinDesk spoke with traders who have found success in the perpetual futures market. They highlighted the deep liquidity, low trading fees, and efficient margin usage of perps. However, traders also expressed concerns about the funding rates associated with perps, which can add up over time. One trader, Lucas Krenn, noted that perps are not just one tool among many, but rather the primary instrument for crypto-native firms. He explained that dated futures are often illiquid, making it difficult for traders to execute large orders without significantly impacting prices. Another trader, Kenneth Ong, shared a similar perspective, citing the benefits of perps for retail traders, including better fills, lower fees, and the ability to hold both long and short positions simultaneously. Ong started trading in the spot market but eventually shifted to perps due to their advantages. Both Krenn and Ong emphasized the importance of margin efficiency in perps, which allows traders to manage risk more effectively. The perpetual nature of perps has also changed the way price discovery occurs, with markets reacting to news and events outside of traditional trading hours. Traders are drawn to perps due to their liquidity and efficiency, but they also acknowledge the risks associated with funding rates. Unlike dated futures, which have a fixed interest rate, perps have a funding rate that changes over time and can be a burden for traders. Krenn and Ong warned that funding rates can be a significant expense, especially for traders who hold positions for extended periods. The funding rate is typically charged every eight hours and can be difficult to hedge. The traders also discussed the concept of 'perpification' of various assets, which is gaining momentum. They believe that this trend will continue, with perps becoming an increasingly important part of the trading landscape. However, they also cautioned that the funding rate exposure associated with perps can be volatile and difficult to quantify. As Krenn noted, 'Until there is a liquid dated curve in crypto, the whole market is carrying an interest rate exposure it cannot price and cannot hedge.' In conclusion, while perps have democratized futures trading by providing access, cost savings, and margin efficiency, they also come with unique challenges, particularly the unpredictable funding rate exposure.